91Ó°ÊÓ

Capital budgeting is the method which include the discounting and non-discounting technique to determine whether to accept the any investment and project or not.

Calculation of PVIFA:

$\begin{array}{c}{\mathrm{PV}}_{\mathrm{IFA}}=\frac{\mathrm{Initial}\mathrm{investment}}{\mathrm{Average}\mathrm{cash}\mathrm{flow}}\\ =\frac{\mathrm{\$}50,000}{\mathrm{\$}22,000}\\ =2.273\end{array}$

For n=3, we will find 2.273 falls, around 15% or 16%.

Calculation of present value under each percent of estimated IRR:

15%:

16%:

Since NPV is still higher than the initial investment, we will try a higher rate:

The net present value is below the initial investment; the IRR will be between 16% and 17%. Now, We will interpolate:

Calculation of IRR:

$\begin{array}{c}\mathrm{IRR}=16\mathrm{\%}+\frac{\mathrm{\$}177}{\mathrm{\$}780}\\ =16\mathrm{\%}+0.23\mathrm{\%}\\ =16.23\mathrm{\%}\end{array}$

The business entity must not purchase the machine because the internal rate of return is less than the cost of capital.